The (Mythical?) Housing Wealth Effect

Charles Calomiris, Stanley D. Longhofer and William Miles

No 15075, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Models used to guide policy, as well as some empirical studies, suggest that the effect of housing wealth on consumption is large and greater than the wealth effect on consumption from stock holdings. Recent theoretical work, in contrast, argues that changes in housing wealth are offset by changes in housing consumption, meaning that unexpected shocks in housing wealth should have little effect on non-housing consumption. We reexamine the impact of housing wealth on non-housing consumption, employing the Case-Quigley-Shiller data on U.S. housing wealth that have been used in prior studies to estimate a large housing wealth effect. Existing empirical work fails to control for the fact that changes in housing wealth may be correlated with changes in expected permanent income, biasing the resulting estimates. Once we control for the endogeneity bias resulting from the correlation between housing wealth and permanent income, we find that housing wealth has a small and insignificant effect on consumption. Additional analysis of time-series results provides further support for that view.

JEL-codes: E21 E32 R21 R31 (search for similar items in EconPapers)
Date: 2009-06
New Economics Papers: this item is included in nep-mac and nep-ure
Note: EFG
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Citations: View citations in EconPapers (47)

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